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How to Handle the Friday February 21 Options Expiration

Followers of the Mad Hedge Fund Trader alert service have the good fortune to own three in-the-money options positions that expires on Friday, February 21, and I just want to explain to the newbies how to best maximize their profits.

This involves the:

Current Capital at Risk

Risk On

(NVDA) 2/$90-$95 call spread 10.00%

(VST) 2/$100-$110 call spread 10.00%

Risk Off

(TSLA) 2/$540-$550 put spread -10.00%

Total Net Position 10.00%

Total Aggregate Position 30.00%

Provided that we don’t have a monster move down in the market in two trading days, these positions should expire at their maximum profit points.

So far, so good.

I’ll take the example of the (TSLA) 2/$540-$550 put spread.

Your profit can be calculated as follows:

Profit: $10.00 expiration value - $8.80 cost = $1.20 net profit

(12 contracts X 100 contracts per option X $1.20 profit per option)

= $1,440 or 13.64% in 22 trading days.

Many of you have already emailed me asking what to do with these winning positions.

The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.

You don’t have to do anything.

Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.

The entire profit will be credited to your account on Monday morning, February 24, and the margin freed up.

Some firms charge you a modest $10 or $15 fee for performing this service.

If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.

Although the expiration process is now supposed to be fully automated, occasionally, machines do make mistakes. Better to sort out any confusion before losses ensue.

If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.

Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when a security has only hours or minutes until expiration on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.

This is known in the trade as the “expiration risk.”

One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.

I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.

I’m looking to cherry-pick my new positions going into the next quarter end.

Take your winnings and go out and buy yourself a well-earned dinner.

Well done, and on to the next trade.

You Can’t Do Enough Research

February 19, 2025/by april@madhedgefundtrader.com

The Market Outlook for the Week Ahead, or The Tale of Two Markets

Diary, Homepage Posts, Newsletter

While trading one market is hard enough, two is almost more than one can bear. In fact, we have all been trading two markets since 2025 began.

On the up days, it appears that the indexes are about to break out of a tediously narrow trading range. The market’s inability to go down is proof that it has to go up. Thursday was one of those days.

These are followed by down days, it appears that the indexes are about to break down. The market’s inability to stay up is proof that it has to go down. Wednesday was one of those days.

Up….down….up….down. Please excuse me if I get dizzy, which I shouldn’t, as I am a former combat pilot.

The market is calling Trump's bluff, rising in the face of threatened whopping great tariff increases against most of the world. So far, lots of noise, no action. The bark is worse than the bite. As I have been saying all year, ignore the noise and don’t fight the tape.

Which brings me to the price of copper.

Look at the ten-year chart of the red metal below, and you see a pretty positive formation is taking place. You have a similar set up in the chart of Freeport McMoRan, the world’s largest producer of copper.

This is in the face of huge negatives, like the failure of the Chinese economy to recover, the end of all alternative energy subsidies, the government announcing that it will no longer mint pennies, and the ongoing recession in residential real estate.

The seasoned trader in me knows that when you throw bad news on a commodity and it fails to go down, you buy the heck out of it. Is copper discounting the expansion of the grid independent of government assistance? There is more than meets the eye here.

What if the end of the Ukraine War is the big black swan of 2025? The best estimate for the cost of the reconstruction of Ukraine is $1 trillion. That would require a lot of copper, maybe a China’s worth.

It would also present major positives for the global economy. It would give us a peace dividend on the scale of the last one that started in 1991. For a start, energy prices would collapse as restrictions on the export of 10 million barrels a day of Russian oil come off. Ukraine would reclaim its position as one of the world’s largest food exporters, especially wheat and sunflower oil.

I know that Russia is close to running out of weapons. Some two-thirds of Russia’s tanks and planes have been destroyed, and they don’t have the parts to build new ones. That is forcing them to draw on military stockpiles from the 1950s.

I have first-hand knowledge of this. I learned from the Pentagon that the Russian missile fired at me on the eastern front lines failed to explode because it was 55 years old. The best estimate is that Russia will completely run out of some kinds of weapons by this summer.

February has started with a respectable +2.73% return so far. That takes us to a year-to-date profit of +8.53% so far in 2025. My trailing one-year return stands at a spectacular +86.48% as a bad trade a year ago fell off the one-year record. That takes my average annualized return to +50.14% and my performance since inception to +759.42%.

I used the brief weakness in Goldman Sachs (GS) to add a new long. I took profits on my two longs in Tesla on a bounce. That tops up our portfolio with a remaining short in (TSLA) and longs in (NVDA) and (VST). These latter positions expire in three trading days at max profit.

Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 74 of 94 trades have been profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.

Try beating that anywhere.

US Q4 Profits Hit Three-Year High. With reports in from nearly 70% of the S&P 500 companies as of Wednesday, fourth-quarter earnings are estimated to have risen 15.1% from a year earlier, up from an estimate of 9.6% growth at the start of January. The S&P 500 communication services sector, which includes companies such as Meta Platforms (META), is leading estimated fourth-quarter earnings gains among sectors, with year-over-year growth of 32.2%.

Core Inflation Rate Comes in Red Hot at 0.50%. Overall, advance was broad, led by shelter, food, and medicine. Shelter accounted for nearly 30% of the advance, according to the report from the Bureau of Labor Statistics out Wednesday. The so-called core CPI also climbed by more than forecast. That reflected higher prices for car insurance, airfares, and a record monthly increase in the cost of prescription drugs. It looks like no interest rate cuts for 2025.

PPI comes in Hot, reversing the gains on inflation of the past two years. The Producer Price Index, a measurement of average price changes seen by producers and manufacturers, rose 0.4% on a monthly basis and 3.5% for the 12 months ended in January. That held steady with December, which was upwardly revised to 3.5% according to Bureau of Labor Statistics data released Thursday.

US announced European Tariffs this Week, tanking stocks on Friday. Steel and metals shares are surging this morning. It’s pretty clear that markets hate all things tariff-related. Can we talk more about deregulation, which markets love? The reality is that markets don’t know how to price in Trump, swinging back and forth between euphoria one moment to Armageddon another. Best case, markets flatline. Worst case, they crash.

Gold (GLD) is headed for $3,000, my long-term target, on central bank and flight to safety buying. What’s the next target? $5,000 is the current turmoil in Washington continues. Notice that it’s the physical metal that’s moving, not the miners.

Foreign Investors Continue to Soak Up US Debt, seeking higher interest rates in an appreciating currency. Americans own 55% of the outstanding $36 trillion in US debt, while foreign investors own 24%, and the Federal Reserve 13%.

Wall Street Souring on Magnificent Seven. The market stronghold has diminished slightly, as the cohort struggles to meet ever-loftier expectations, and investors rotate into other parts of the market such as small caps. Tech titans also took a hit in late January after the emergence of Chinese startup DeepSeek raised concerns over how much spending will be needed to implement AI capabilities.

Market is Giving Up on any Interest Rate Cuts this Year, as the prospects of rising inflation from trade wars weigh on the market. Economists have warned that a wide-scale trade war could significantly raise prices, and consumers appear to be worried as well. Respondents to the University of Michigan’s consumer sentiment poll released Friday indicated they expect inflation to run at a 4.3% rate a year from now, up a full percentage point from the January reading.

Tesla Tanks 7%, and down 34% since December after Chinese competitor BYD announces a partnership with DeepSeek. The move is expected to accelerate BYD’s move into full self-driving. Tesla sales are falling in all major markets. Call it DeepSeek hit part 2.

Weekly Jobless Claims Fall. Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 213,000 for the week ended February 8, the Labor Department said on Thursday. Economists polled by Reuters had forecast 215,000 claims for the latest week.

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale force headwinds. The economy will completely stop decarbonizing. Technological innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.

My Dow 240,000 target has been pushed back to 2035.

On Monday, February 17, markets are closed for President's Day.

On Tuesday, February 18 at 8:30 AM EST, the New York Empire State Manufacturing Index is released.

On Wednesday, February 19 at 8:30 AM EST, the New Housing Starts are printed.

On Thursday, February 20 at 8:30 AM, the Weekly Jobless Claims are disclosed.

On Friday, February 21 at 8:30 AM, the Existing Home Sales are announced. At 2:00 PM the Baker Hughes Rig Count is printed.

As for me, I was having lunch at the Paris France casino in Las Vegas at Mon Ami Gabi, one of the top ten grossing restaurants in the United States. My usual waiter, Pierre from Bordeaux, took care of me in his typical ebullient way, graciously letting me practice my rusty French.

As I finished an excellent but calorie-packed breakfast (eggs Benedict, caramelized bacon, hash browns, and a café au lait), I noticed an elderly couple sitting at the table next to me. Easily in their 80s, they were dressed to the nines and out on the town.

I told them I wanted to be like them when I grew up.

Then I asked when they first went to Paris, expecting a date sometime after WWII. The gentleman responded, “Seven years ago”.

And what brought them to France?

“My father is buried there. He’s at the American Military Cemetery at Colleville-sur-Mer along with 9,386 other Americans. He died on Omaha Beach on D-Day. I went for the D-Day 70^th anniversary.” He also mentioned that he never met his dad, as he was killed in action weeks after he was born.

I reeled with the possibilities. First, I mentioned that I participated in the 40-year D-Day anniversary with my uncle, Medal of Honor winner Mitchell Paige, and met with President Ronald Reagan.

We joined the RAF fly-past in my own private plane and flew low over the invasion beaches at 200 feet, spotting the remaining bunkers and the rusted-out remains of the once floating pier. Pont du Hoc is a sight to behold from above, pockmarked with shell craters like the moon. When we landed at a nearby airport, I taxied over railroad tracks that were the launch site for the German V1 “buzz bomb” rockets.

D-Day was a close-run thing and was nearly lost. Only the determination of individual American soldiers saved the day. The US Navy helped too, bringing destroyers right to the shoreline to pummel the German defenses with their five-inch guns. Eventually, battleships working in concert with very lightweight Stinson L5 spotter planes made sure that anything the Germans brought to within 20 miles of the coast was destroyed.

Then the gentleman noticed the gold Marine Corps pin on my lapel and volunteered that he had been with the Third Marine Division in Vietnam. I replied that my father had been with the Third Marine Division during WWII at Bougainville and Guadalcanal and that I had been with the Third Marine Air Wing during Desert Storm.

I also informed him that I had led an expedition to Guadalcanal two years ago looking for some of the 400 Marines still missing in action. We found 30 dog tags and sent them to the Marine Historical Division at Quantico, Virginia, for tracing. I proudly showed them my pictures.

When the stories came back, it turned out that many survivors were children now in their 80s who had never met their fathers because they were killed in action on Guadalcanal.

Small world.

I didn’t want to infringe any further on their fine morning out, so I excused myself. He said Semper Fi, the Marine Corps motto, thanked me for my service, and gave me a fist pump and a smile. I responded in kind and made my way home.

Oh, and say “Hi” when you visit Mon Ami Gabi. Tell Pierre that John Thomas sent you and give him a big tip. It’s not easy for a Frenchman to cater to all these loud Americans.

Third Marine Air Wing

The D-Day Couple

The American Military Cemetery at Colleville-sur-Mer

Stay Healthy,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

February 18, 2025/by april@madhedgefundtrader.com

Revisiting the Great Depression

Diary, Homepage Posts, Newsletter

When I first arrived on Wall Street during the early 1980s, some of the old veterans who worked through the 1929 stock market crash were just retiring and passed their stories on to me before they left.

One was my old friend, Sir John Templeton, founder of the Templeton funds, who often hosted me for dinner at his antebellum-style mansion at Lyford Cay in the Bahamas. John told me he was really excited when hired in ‘29 to handle the surge of brokerage business. After that, things got really boring for a decade.

The volatility we are experiencing now has many similarities to that epic event. In some ways, it's far worse. The 1929 downturn was spread over 34 months.

We all know about the Roaring Twenties, with flappers, bathtub gin, and a soaring stock market. Then, individuals could buy on ten to one margin. The high-flying tech stocks of the day, like RCA Radio, General Motors (GM), and Ford (F), soared. From 1921 to 1929, the Dow Average rocketed six-fold. The working class was sucked in.

Industry followed suit, taking the sign of rising stocks as proof of an economic boom. They massively boosted production in all sectors. That meant they went into the Great Depression loaded to the gills with inventory.

The Dow Average peaked on September 3, 1929, at 381. A slow burn of profit-taking ensued. Suddenly, a cascading waterfall of SELL orders hugely accelerated on “Black Monday” when the Dow plunged by 13%. It was followed by “Black Tuesday” when stocks lost another 13%.

Margin calls triggered a run on the banks as investors tried to withdraw cash to cover rampant cash calls. This spawned a financial crisis where eventually 4,000 banks went under.

By November, the Dow had fallen by 48% to 198. JP Morgan stepped in to stabilize the market, prompting a short-term rally. It was to no avail, with many retail investors seeing this as their last chance to sell. The market continued its slide, eventually hitting bottom at 41, or down an astonishing 89% from the top by July 8, 1932. The market then moved sideways in a wide 150-point range until the outbreak of WWII. It didn’t recover its 1929 peak until 1959.

A few years ago, I had lunch with the former governor of the Federal Reserve (click here), who did his PhD dissertation on the causes of the Great Depression. The big mistake the Fed made then was to raise interest rates to damp down stock speculation. They ended up destroying the economy, inadvertently making the depression far deeper and longer.

The world has learned a lot about central banking since those dark days. For a start, the theory of Keynesianism has been adopted whereby governments borrow and spend during economic downturns and run balanced budgets or surpluses during good times.

The modern Fed won’t be making the same mistake twice. During the last bear market, the Fed almost immediately took interest rates down to zero. Our central bank has also responded with monetary stimulus that is a large multiple of what we saw in 2008-09, essentially buying everything that was out there in fixed-income land.

My grandfather never participated in the stock boom of the 1920’s. He never found a broker he could trust. When the market crashed, he had to finish his basement in Brooklyn, New York, so that several relatives who had lost their homes could move in. We lost many equity investors for good in the 2008-09 crash. No doubt we will lose many more in this cycle.

What did Grandpa do with his money? He poured it all into real estate, including the land on which the Bellagio Hotel was eventually built, which he picked up for $500 an acre. His estate sold it in the 1970’s for $10 million.

Grandpa never bought a stock during his entire life.

Grandpa on Right

February 13, 2025/by Mad Hedge Fund Trader

Exploring my New York Roots

Diary, Homepage Posts, Newsletter

While in New York waiting to board Cunard’s Queen Mary 2 to sail for Southampton, England, a few years ago, I decided to check out the Bay Ridge address near the Verrazano Bridge where my father grew up. I took a limo over to Brooklyn and knocked on the front door.

I told the owner about my family history with the property, but I could see from the expression on his face that he didn’t believe a single word. Then I told him about the relatives moving into the basement during the Great Depression.

He immediately let me in and gave me a tour of the house. He told me that he had just purchased the home and had extensively refurbished it. When they tore out the walls in the basement, he discovered that the insulation was composed of crumpled-up newspapers from the 1930s, so he knew I was telling the truth.

I told him that grandpa would be glad that the house was still in Italian hands. Could I enquire what he had paid for the house that sold in 1923 for $3,000? He said he bought it as a broken-down fixer upper for a mere $775,000. After he put $500,000 into the property, it is now worth $2 million.

I’ll recite one story that took place at this address which has been passed down through the generations. By the end of 1945, the family had not seen my father for nearly four years, who was off fighting in the Pacific with the Marine Corps.

Then a telegram arrived informing the family of the date of my father’s return after a five-day train ride from Los Angeles. As only two daughters remained at home, he warned everyone not to cry.

Then the doorbell rang and there was Dad, 40 pounds lighter with a yellowish tinge to his skin from malaria but smiling. My grandfather burst into tears and wouldn’t stop bawling for an hour.

As I passed under the Verrazano Bridge on the Queen Mary II later that day, I contemplated how much smarter grandpa became the older I got.

I hope the same is true with my kids.

Queen Mary II Passing Under the Verrazano Bridge

February 13, 2025/by Mad Hedge Fund Trader

The ABCs of the VIX

Diary, Homepage Posts, Newsletter

I am one of those cheapskates who buy Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar because my 11-month theoretical return on capital comes close to 1,000%.

I also like buying flood insurance in the middle of the summer drought, when the forecast in California is for endless days of sunshine. That is what we had at the end of July when the (VIX) was plumbing the depths of $12.

Get this one right, and the profits you can realize are spectacular.

It gets better.

If the bottom in volatility exactly coincides with the peak in the stock market that it measures, volatility could be headed back up to the 30% handle, and maybe more.

I double dare you to look at the charts below and tell me this isn’t happening.

Watch carefully for other confirming trends to affirm this trade is unfolding. Those would include a strong dollar, and a weak Japanese yen, Euro, and rising fixed-income instruments of any kind.

Notice that every one of these is happening this week!

Reversion to the mean, anyone?

You may know of this from the many clueless talking heads, beginners, and newbies who call (VIX) the “Fear Index”.

For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of option contracts on the S&P 500 index (SPX).

The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations.

The (VIX) is the square root of the par variance swap rate for a 30-day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever-useful Black-Scholes equation.

You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?

For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don’t know what an SAT test is, this is what you need to know.

When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. Period. End of story. Class dismissed.

The (VIX) is expressed in terms of the annualized monthly movement in the S&P 500 (SPX), which with the (VIX) today at $10 is at $72.54.

So for example, a (VIX) of $10 means that the market expects the index to move 2.89%, or $72.54 S&P 500 points, over the next 30 days.

You get this by calculating $10/3.46 = 2.89%, where the square root of 12 months is 3.46.

The volatility index doesn’t really care which way the stock index moves. If the S&P 500 moves more than the projected 2.89% in ANY direction, you make a profit on your long (VIX) positions.

I am going into this detail because I always get a million questions whenever I raise this subject with volatility-deprived investors.

It gets better.

Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006.

Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the “hedge” in hedge fund.

February 12, 2025/by Mad Hedge Fund Trader

Making Volatility Your Friend

Diary, Homepage Posts, Newsletter

With the Volatility Index back down to a bargain $16, I am getting deluged with emails from readers asking if it is time to start hedging portfolios one more time and buying the iPath S&P 500 VIX Short Term Futures ETN (VXX).

The answer is not yet, but soon, possibly very soon. And here is the anomaly in the market today. Volatility does not reflect actual short-term movements in the S&P 500.

While we have seen several 200-point moves in the market in the past three weeks, the volatility Index (VIX) has spent only hours over the $20 level. That is because the ($VIX) measures anticipated 30-day volatility, and for the past 30 days, the overall net move in the market has been zero.

They are inquiring at absolutely the wrong time.

And here is the problem. When the (VIX) rises, it usually spikes straight up and then right back down again. This time, it spiked but has since hung around the $20 level rather than collapse back down. That suggests that there is another leg up to go in volatility until it hits $50 or more before it takes a much-deserved break. That means the stock market has one more sharp selloff left before we hit bottom and bounce.

Markets can ignore trade wars, rising interest rates, rocketing interest rates, and international political instability (Gaza, Ukraine) for a while, but not forever. When the time DOES come to pay the piper, prices will fall, and volatility will rocket.

So, I am more than usually interested in hedging the downside risk for my trading book. A good rule of thumb is to let the (VIX) sit at a bottom for a week, and then go buy the (VXX). Two weeks is even better. That way, you can ignore expensive and unnecessary time decay.

Which all brings me to the subject at hand.

If you are new to the service and have no longs, you probably should skip this trade and just watch it as a learning experience.

This can also be a great hedge for any long positions we may want to add in the coming weeks, such as in “trade peace” or technology plays.

As I never tire of telling people, no one ever complains when they buy fire insurance and their house doesn’t burn down.

If you are new to this service, don’t freak out. My daily research newsletters are not always about exploring the esoterica of options or volatility trading.

I’ll let you know when I’m ready to pull the trigger with a Trade Alert.

I am always trying to get better prices.

February 11, 2025/by april@madhedgefundtrader.com

The Market Outlook for the Week Ahead, or Back to Boot Camp

Diary, Homepage Posts, Newsletter

I have a new outlook for the US stock markets.

The current government's economic policy reminds me a lot about the Marine Corps boot camp. Through harsh treatment and rigorous training, the Marines seek to destroy incoming recruits. They then spend 13 weeks rebuilding a new soldier from scratch who is obedient, respectful, follows orders, and is in much better physical condition. He is also a pretty good shot.

Since Trump inherited an almost perfect economy, with 3% real GDP growth, 2.8% inflation, and 4% unemployment, he has to break it first. Then he can spend the next four years rebuilding it and take credit for the recovery.

It looks like we are going to get more on the destruction front this week, with the US announcing European tariffs, which tanked stocks on Friday. We could remain in the destruction phase for the rest of the year. It sets up nicely at least a 20% correction sometime in 2025. Oh, and never buy on a Friday. All of the “shock and awe” announcements are occurring on the weekends. Wait for the Monday morning opening and buy the collapse.

It’s pretty clear that markets hate all things tariff-related. Can we please talk more about deregulation, which markets love? The reality is that markets don’t know how to price in Trump, swinging back and forth between euphoria one moment to Armageddon another. Best case, markets flat line. Worst case, they crash.

Here are some additional causes for concern. Big Tech was the only stock market sector that saw net inflows in 2024. It was also the only down sector in January. It just so happens to be the most overweight sector among almost all individuals and institutions, including yours. Big Tech now accounts for 35% of stock market capitalization. It is a concentration on steroids. So when we finally DO get a correction, it will be a big one, easily more than 10%.

Looking at stock market performance around the world since the 2008-09 financial crisis, it’s easy to see where the idea of American exceptionalism comes from. Since 2010, the German stock market (EWG) is up by 142% and the UK (EWU) by 112%. During the same 15-year period, the S&P 500 (SPY) soared by 1,112%, an outperformance of an eye-popping 8:1.

Since the beginning of 2025, the German stock market (EWG) is up by 12.7% and the UK (EWU) by 9%. In the meantime, the S&P 500 has managed a mere 3.5% gain. What has happened? Has something changed? Is American exceptionalism a thing of the past? If so, it would be terrible news for stocks.

In the rest of the world, 26% of corporate cash flow is reinvested in the company. In the US, it’s 42%, and for the Magnificent Seven, it’s 57%. This is American Exceptionalism distilled by a single driver. If this continues, that’s great. If rampant uncertainty drives US companies into hiding, it won’t. 90-day US Treasury bills yielding a risk-free 4.2% look pretty good in this new chaotic world, especially if you are still sitting on the gigantic profits of the past two years.

This is why Foreigners have been pouring money into the US as fast as possible and has been a major factor in our price appreciation until now. Foreign investors now own $23 trillion worth of American debt, equities, and real estate today versus only $8 trillion in 2017.

As I mentioned last week, when I suggest a European investment idea to a European, they tell me I am out of my mind and beg for more US investment ideas. I know this because about one-third of the Mad Hedge subscribers are aboard in 134 countries.

And this is why markets are so jittery. Some 23% of all the completed cars sold in the US are actually made in Mexico and Canada. For auto parts, the figure is more than 50%. The US sold 3.7 million vehicles made in Mexico and Canada. The new 25% tariff will increase prices by $6,300 per vehicle. Average car prices are now at $50,000 and are already at all-time highs. That works out to a $22.7 billion tax on the buyers of new cars who are mostly middle class.

My bet? That the prices of used cars soar, which aren’t subject to any such taxes.

Turn off the TV. Ignore the noise. Buy the down days and sell the up days. It’s no more complicated than that. If you want to play headline ping pong with the president, be my guest. But you’ll lose your shirt.

February has started with a breakeven +0.57% return so far.
That takes us to a year-to-date profit of +6.25% so far in 2025. My trailing one-year return stands at +83.45% as a bad trade a year ago fell off the one-year record. That takes my average annualized return to +5.23% and my performance since inception to +757.12%.

I used the weakness in Tesla to double up my long there. That tops up our portfolio to a long in (TSLA), a short in (TSLA), and longs in (NVDA) and (VST).

Try beating that anywhere.

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.

My Dow 240,000 target has been pushed back to 2035.

On Monday, February 10, nothing of note takes place.

On Tuesday, February 11, at 8:30 AM EST, the NFIB Business Optimism Index is released.

On Wednesday, February 12 at 8:30 AM, the Core Inflation Rate is printed.

On Thursday, February 13 at 8:30 AM, the Weekly Jobless Claims are disclosed.

On Friday, February 14 at 8:30 AM, the Producer Price Index is announced. At 2:00 PM the Baker Hughes Rig Count is printed.

As for me, it was with a heavy heart that I boarded a plane for Los Angeles to attend a funeral for Bob, the former scoutmaster of Boy Scout Troop 108.

The event brought a convocation of ex-scouts from up and down the West coast and said much about our age.

Bob, 85, called me two weeks ago to tell me his CAT scan had just revealed advanced metastatic lung cancer. I said, “Congratulations Bob, you just made your life span.”

It was our last conversation.

He spent only a week in bed and then was gone. As a samurai warrior might have said, it was a good death. Some thought it was the smoking he quit 20 years ago.

Others speculated that it was his close work with uranium during WWII. I chalked it up to a half-century of breathing the air in Los Angeles.

Bob originally hailed from Bloomfield, New Jersey. After WWII, every East Coast college was jammed with returning vets on the GI bill. So he enrolled in a small, well-regarded engineering school in New Mexico in a remote place called Alamogordo.

His first job after graduation was testing V2 rockets newly captured from the Germans at the White Sands Missile Test Range. He graduated to design ignition systems for atomic bombs. A boom in defense spending during the fifties swept him up to the Greater Los Angeles area.

Scouts I last saw at age 13 or 14 were now 60, while the surviving dads were well into their 80s. Everyone was in great shape, those endless miles lugging heavy packs over High Sierra passes obviously yielding lifetime benefits.

Hybrid cars lined both sides of the street. A tag-along guest called out for a cigarette, and a hush came over a crowd numbering over 100.

Apparently, some things stuck. It was a real cycle of life weekend. While the elders spoke about blood pressure and golf handicaps, the next generation of scouts played in the backyard or picked lemons off a ripening tree.

Bob was the guy who taught me how to ski, cast rainbow trout in mountain lakes, transmit Morse code, and survive in the wilderness. He used to scrawl schematic diagrams for simple radios and binary computers on a piece of paper, usually built around a single tube or transistor.

I would run off to Radio Shack to buy WWII surplus parts for pennies on the pound and spend long nights attempting to decode impossibly fast Navy ship-to-ship transmissions. He was also the man who pinned an Eagle Scout badge on my uniform in front of beaming parents when I turned 15.

While in the neighborhood, I thought I would drive by the house in which I grew up, once a modest 1,800 square foot ranch-style home to a happy family of nine. I was horrified to find that it had been torn down, and the majestic maple tree that I planted 40 years ago had been removed.

In its place was a giant, 6,000-square-foot marble and granite monstrosity under construction for a wealthy family from China.

Profits from the enormous China-America trade have been pouring into my hometown from the Middle Kingdom for the last decade, and mine was one of the last houses to go.

When I was class president of the high school here, there were 3,000 white kids and one Chinese. Today, those numbers are reversed. Such is the price of globalization.

I guess you really can’t go home again.

At the request of the family, I assisted in the liquidation of his investment portfolio. Bob had been an avid reader of the Diary of a Mad Hedge Fund Trader since its inception, and he had attended my Los Angeles lunches.

It seems he listened well. There was Apple (AAPL) in all its glory at a cost of $21. I laughed to myself. The master had become the student, and the student had become the master.

Like I said, it was a real circle of life weekend.

Scoutmaster Bob

1965 Scout John Thomas

The Mad Hedge Fund Trader at Age 11 in 1963

Stay Healthy,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

February 10, 2025/by april@madhedgefundtrader.com

A Note on Assigned Options, or Options Called Away

Diary, Homepage Posts, Newsletter

I just received an excited text message from an excited Concierge client. His short position in the (TSLA) February 2025 $540-$550 vertical bear put debit spread had just been called away. That meant he would receive the maximum profit a full 11 trading days before the February 21 option expiration.

With the heightened volatility this week, I am seeing an increasing number of options positions assigned or called away.

I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.

I still have five positions left in my model trading portfolio that is deep in-the-money, and about to expire in 9 trading days on the February 21 options expiration day. Those are the

Current Capital at Risk

Risk On

(TSLA) 2/$300-$310 call spread 10.00%

(TSLA) 2/$310-$320 call spread 10.00%

(NVDA) 2/$90-$95 call spread 10.00%

(VST) 2/$100-$110 call spread 10.00%

Risk Off

(TSLA) 2/$540-$550 spread -10.00%

Total Net Position 30.00%

Total Aggregate Position 50.00%

That opens up a set of risks unique to these positions.

I call it the “Screw up risk.”

As long as the markets maintain current levels, this position will expire at its maximum profit value.

There is a heightened probability that your short position in the options may get called away.

Although the return for those calling away your options is very small, this is how to handle these events.

If exercised, brokers are required by law to email you immediately, and I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.

If it happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.

Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.

The short options can get “assigned” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.

You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.

Let’s say you get an email from your broker telling you that your call options have been assigned away.

I’ll use the example of the Berkshire Hathaway (BRK/B) August 2024 $405-$415 in-the-money vertical Bull Call spread since so many of you had these.

For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 11 days before the August 16 expiration date.

In other words, what you bought for $8.70 on July 12 is now worth $10.00, giving you a near-instant profit of $1,300 or 14.94% in only 11 trading days.

All you had to do was to call your broker to instruct them to “exercise your long position in your (BRK/B) August 16 $405 calls to close out your short position in the (BRK/B) August 2024 $410 calls.”

You must do this in person. Brokers are not allowed to exercise options automatically, on their own, without your expressed permission.

You also must do this the same day that you receive the exercise notice.

This is a perfectly hedged position. The name, the ticker symbol, number of shares, and number of contracts are all identical, so you have no exposure at all.

Call options are a right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.

Short positions usually only get called away for dividend-paying stocks or interest-paying ETFs like the (BRK/B). There are strategies out here that try to capture dividends the day before they are payable. Exercising an option is one way to do that.

Weird stuff like this happens in the run-up to options expirations like we have coming.

A call owner may need to sell a long (BRK/B) position after the close, and exercising his long (BRK/B) call, which you are short, is the only way to execute it.

Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.

There are thousands of algorithms out there that may arrive at some twisted logic that the puts need to be exercised.

Many require a rebalancing of hedges at the close every day, which can be achieved through option exercises.

And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.

And here’s another possible outcome in this process.

Your broker will call you to notify you of an option called away and then give you the wrong advice on what to do about it.

There is a further annoying complication that leads to a lot of confusion. Lately, brokers have resorted to sending you warnings that exercises MIGHT happen to help mitigate their own legal liability.

They do this even when such an exercise has zero probability of happening, such as with a short call option in a LEAPS that has a year or more left until expiration. Just ignore these, or call your broker and ask them to explain.

This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.

There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. In fact, I think I’m the last one they really did train.

Avarice could have been an explanation here, but I think stupidity, poor training, and low wages are much more likely.

Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.

This exercise process is now fully automated at most brokers, but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.

Some may also send you a link to a video of what to do about all this.

If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.

Professionals do these things all day long, and exercises become second nature, just another cost of doing business.

If you do this long enough, eventually you get hit. I bet you don’t.

Calling All Options!

February 7, 2025/by april@madhedgefundtrader.com

How to Join the Early Retirement Stampede

Diary, Homepage Posts, Newsletter

There is a new social movement taking place which you probably haven’t heard about.

Increasing numbers of people, especially Millennials, are engineering their personal finances to make early retirement possible. I’m not talking about hanging it up at 60, 55, or even 50. I’m talking extreme early retirement, like 45, 40, or even 30!

I stumbled across a free app the other day at NerdWallet, and started playing around with a compound interest calculator to see just how much you had to save on a monthly basis to make such incredible early retirements possible. What I discovered was amazing. To check it out, please click here.

And here is the big revelation. Assuming that you started saving at the age of 20, you only need to bank $2,150 a month to reach $1 million in retirement savings by the age of 40. If you earn the country’s average wage of $60,000 a year, and you’re paying $1,000 a month in taxes, that means you only have $1,850 a month left to handle housing, health care, education, transportation, and food.

The key to becoming a savings hog is to get off the consumer spending treadmill we have all been trained to plod since birth. You don’t have to endlessly upgrade to ever larger McMansions, especially now that the SALT deductions are gone.

You don’t have to buy a new $50,000 car every three years either. Just buy a junk heap for $5,000 and run it forever. It’s amazing how much gas, insurance, maintenance, and interest payments can add up. I recommend a Toyota Corolla. They last forever.

And what is the most expensive luxury of all? Kids. Raising a child today costs a minimum of $250,000, and that assumes they don’t go to an Ivy League college. I know because I have five. A lot of Millennials are downsizing to one child, or none at all, and putting that quarter million towards their early retirement fund.

If you live here in the San Francisco Bay Area, this would mean living in a cardboard box under a freeway overpass. However, an increasing number of Millennials are engaging in what I call “income/expense” arbitrage.

Earn your income in an expensive city, like San Francisco, San Jose, or New York, but live in a cheap place like Reno, NV, Charlotte, NC, or Cedar Rapids IA. In that case, banking your $2,150 a month is a piece of cake.

Those who work online, about 25% of the Bay Area population now, have a particular advantage here. With a decent broadband connection, you can work anywhere.

Companies are going out of their way to facilitate this trend, requiring office attendance only from Tuesday to Thursday and permitting telecommuting on Monday and Friday. That enables distant, even interstate commutes. I have a Bay Area dentist who commutes from Santa Barbara 300 miles away every week on this schedule.

You can even do this at an international level. A couple can live like a king in Budapest, Hungary, or Quito, Ecuador for $1,000 a month, and in a beachfront home in Albania for $500. With that kind of overhead early retirement becomes a realistic short-term objective.

Once you retire you will have to live on $60,000 a year, or $5,000 a month, eminently doable in most of the country, not including your social security payments or taxes. And with national health care in the US likely over the next 20 years, health care costs are about to fall dramatically.

Provided you don’t pursue expensive hobbies like my retired friends, such as collecting vintage cars, racing horses, joining expensive golf clubs, or flying around in private jets, you should be able to live within these modest means.

How about camping? That is almost free!

Of course, you can’t live on the coasts for $60,000 a year. But you can do so easily in the heartland. That explains why California and New York home prices have been dead in the water for the last two years, while the Midwest is seeing a renaissance in regional home prices at one-third the cost.

You don’t have to completely retire either. Instead, you could abandon the pressure cooker that is high-tech today and downgrade to a small business, open a restaurant, or turn a hobby into a full-time job. A laid-off FedEx worker I met became a fly-fishing guide and helped me catch that 24-inch trout in Nevada.

It goes without saying that if this trend continues, there are major consequences for the economy, markets, and society that boggle the mind. Greatly higher savings rates will drive prices up and yields down on all investments.

The US birthrate is already well below the replacement rate at 2.1 per couple. Drive it lower and we could get trapped in the Japanese quicksand of an ever-shrinking population. That means fewer consumers and economic stagnation. Reducing working lives from 47 to only 20 years will inevitably create worker shortages, driving up wages and inflation.

There are a few problems with the ultra-early retirement strategy. The 6% return available today with relatively low-risk investments may not be available in a year or two. That would be the result of global quantitative easing that is taking interest rates down to zero everywhere.

This is crushing the investment returns for new retirees. As a result, instead of needing $1 million to generate a $60,000 annual income, you might need $2 million or more. I have been watching this happen to retirees in Japan for nearly 30 years, where interest rates have been near zero since the 1990s.

How much do you need to save each month if you want to retire at 30? Better start banking $6,050 a month. It may be time to upgrade your sleeping bag.

I Keep Failing at Retirement

February 6, 2025/by Mad Hedge Fund Trader

They’re Not Making Americans Anymore

Diary, Homepage Posts, Newsletter

You can count on a bear market hitting some time in 2038, one falling by at least 25%.

Worse, there is almost a guarantee that a financial crisis, severe bear market, and possibly another Great Depression will take place no later than 2058 and would take the major indexes down by 50% or more.

No, I have not taken to using a Ouija board, reading tea leaves, nor examine animal entrails in order to predict the future. It’s much easier than that.

I simply read the data that was just released from the National Center for Health Statistics, a subsidiary of the federal Centers for Disease Control and Prevention (click here for the link).

The government agency reported that the US birth rate fell to a new all-time low for the second year in a row, to 60.2 births per 1,000 women of childbearing age. A birth rate of 125 per 1,000 is necessary for a population to break even. The absolute number of births is the lowest since 1987. In 2017, women had 500,000 fewer babies than in 2007.

These are the lowest number since WWII, when 17 million men were away in the military, a crucial part of the equation.

Babies grow up, at least most of them. In 20 years, they become consumers, earning wages, buying things, paying taxes, and generally contributing to economic growth.

In 45 years, they do so quite substantially, becoming the major drivers of the economy. When these numbers fall, recessions and bear markets occur with absolute certainty.

You have long heard me talk about the coming “Golden Age” of the 2020’s. That’s when a two-decade-long demographic tailwind ensues because the number of “peak spenders’ in the economy starts to balloon to generational highs. The last time this happened was during the 1980’s and 19990’s stocks rose 20-fold.

Right now, we are just coming out of two decades of demographic headwind, when the number of big spenders in the economy reached a low ebb. This was the cause of the Great Recession, the stock market crash, and the anemic 2% annual growth since then.

The reasons for the maternity ward slowdown are many. The Great Recession certainly blew a hole in the family plans of many Millennials. Falling incomes always lead to lower birth rates, with many Millennial couples delaying children by five years or more. Millennial mothers are now having children later than at any time in history.

Burgeoning student debt, which just topped $1.5 trillion is another. Many prospective mothers would rather get out from under substantial debt before they add to the population.

The rising education of women is another drag on childbearing and is a global trend. When spouses become serious wage earners, families inevitably shrink. Husbands would rather take the money and improve their lifestyles than have more kids to feed.

Women are also delaying having children to postpone the “pay gaps” that always kick in after they take maternity leave. Many are pegging income targets before they entertain starting families.

As a result of these trends, one in five children last year were born to women over the age of 35, a new high.

This is how Latin Americans moved from eight to two-child families in only one generation. The same is about to take place in Africa, where standards of living are rising rapidly, thanks to the eradication of several serious diseases.

The sharpest falls in the US have been with minorities. Since 2017 the birth rates for Hispanics have dropped by 27% from a very high level, African Americans 11%, whites 5%, and Asians 4%.

Europe has long had the same problem with plunging growth rates but only much worse. Historically the US has made up for the shortfall with immigration, but that is now falling thanks to the current administration policies. Restricting immigration now is a guarantee of slowing economic growth in the future. It’s just a numbers game.

So watch that growth rate. When it starts to tick up again it’s time to buy….in about 20 years. I’ll be there to remind you with this newsletter.

As for me, I’ve been doing my part. I have five kids aged 15-34, and my life is only half over. Where did you say they keep the Pampers?

I’m Doing My Part

February 5, 2025/by april@madhedgefundtrader.com

Grandpa on Right

Queen Mary II Passing Under the Verrazano Bridge

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